Learning about the consumption risk exposure of firms

Yongjin Kim, Lars-Alexander Kuehn and Kai Li

Journal of Financial Economics, 2024, vol. 152, issue C

Abstract: We structurally estimate an investment-based asset pricing model, in which firms' exposure to macroeconomic risk is unknown. Bayesian beliefs about this parameter are updated from firms' and industry peers' comovement between their productivity and consumption growth. The model implies that discount rates rise endogenously with the perceived risk exposure of firms, thereby depressing investment and valuation ratios. We test these predictions in the data and find strong support for them. We also confirm that cross-sectional learning from peers is crucial and that alternative Bayesian risk estimates, which ignore peer observations, do not predict firm variables.

Keywords: Parameter uncertainty; Bayesian learning; Systematic consumption risk; Investment-based asset pricing; SMM (search for similar items in EconPapers)
JEL-codes: G12 G31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:152:y:2024:i:c:s0304405x2300199x

DOI: 10.1016/j.jfineco.2023.103759

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